Risk-Free Rate

The risk-free rate is the return on an investment with essentially no default risk. For US companies, analysts usually use the yield on a US Treasury bond. It is the starting point of every cost of equity method, since investors can earn it without taking stock market risk.

This site uses 5% in its examples. In CAPM, that 5% plus beta times the equity risk premium gives the cost of equity: 5% + 1.2 x 5% = 11%. Many analysts match the Treasury maturity to the length of the cash flows being valued, often picking a 10-year or 20-year bond.

When Treasury yields rise, cost of equity rises with them, one of the main things that increases cost of equity. For a valuation in another currency, use a rate in that currency. See the capital asset pricing model and the methodology page for how the calculator treats it.